AT&T Merger with DirecTV Could Fumble Because of Football

The blockbuster merger between telephone giant AT&T and satellite TV company DirecTV could fall apart over football.

AT&T dropped the news on Sunday that it would acquire DirecTV’s U.S. and Latin American operations, giving the telephone and Internet company nearly 40 million pay television subscribers in the western hemisphere.

The deal would once again give AT&T a window into the television world, something it had more than a decade ago when it acquired TCI Cablevision (which it later sold to cable giant Comcast for $44.5 billion). The company has struggled to gain ground on its own pay TV offering U-Verse, which has just 5.7 million subscribers.

AT&T has many reasons to desire DirecTV: Both companies already have agreements in place that allow customers to “bundle” DirecTV service with AT&T home phone, wireless and Internet, but a combined operation will allow AT&T to leverage DirecTV’s customers to form more lucrative deals with the networks.

However, the entire merger hinges on one network deal already in place: DirecTV’s agreement with the National Football League to offer out-of-market games during the season for $39 a month. DirecTV pays the NFL about $1 billion to exclusively offer these games to its customers under a package called the NFL Sunday Ticket. The contract to carry the package is set to expire at the end of this upcoming season — right around the same time AT&T’s deal with DirecTV is expected to close.

And if DirecTV can’t solidify another agreement to carry the NFL games, it may also lose its merger with AT&T. According to Bloomberg Businessweek, a “breakup clause” in the agreement reached between AT&T and DirecTV allows AT&T to call the whole thing off — and potentially collect damages — if DirecTV can’t use “its reasonable efforts to obtain such a renewal” with the NFL.

That renewal will come at a price for DirecTV: The Los Angeles Times reports that prior to the merger announcement, the NFL was already asking for a 40 percent premium increase, or about $1.4 billion, from DirecTV to carry the games.

With the merger on the table, the NFL may ask for even more money, especially if DirecTV wants the NFL package extended to AT&T’s U-Verse and wireless subscribers. One DirecTV executive told investors on a conference call post-merger announcement that the NFL seemed enthusiastic “for why this transaction is great for the NFL in the future as well as great for us.”

“I’m still highly confident that we’re going to get our deal done,” DirecTV CEO Michael White said Monday. “If anything, I think this unlocks further opportunities for the NFL and for us, and we’re very excited about the future together.”

The satellite company clearly wants things to work out with the NFL, and the merger with AT&T is a greater incentive for it to make a deal happen at any cost. But the return on the investment may not be where it was several years ago: Just 10 percent of DirecTV subscribers are said to pay for the premium NFL package, and cable companies have recently started offering a similar solution called NFL RedZone which is cheaper and covers many of the same out-of-market games as the Sunday Ticket (RedZone doesn’t show complete games, but its coverage of the games it airs as well as its $5 a month price point is enough to satisfy many).

An insider told the Times that the upcoming deal with DirecTV would likely be the NFL’s last as it looks to expand to other cable platforms or self-distribution online. Currently, DirecTV is seeking an eight-year contract while the NFL wants just five, the insider said.